More Gas for Washington

A who's who of right-leaning military hawks -- including former CIA director R. James Woolsey and Iraq war advocate Frank J. Gaffney Jr. -- has joined with environmental advocates such as the Natural Resources Defense Council to lobby Congress to spend $12 billion to cut oil use in half by 2025.

Coming soon are hybrids that can be plugged into a 120-volt outlet to recharge like a cellphone. They'll get even better mileage.

Add in "flexible fuel" options that already allow many cars to run on a combination of petroleum and fuels like ethanol (derived from corn) and methanol (from natural gas or coal), and you could build vehicles that could get — drum roll, please — 500 miles per gallon of gasoline. That's not science fiction; that's achievable right now.

A car's annual fuel cost is ($/gallon) times (gallons/mile) times miles. So, if we drive a car 10,000 miles a year and gas costs $2.50 per gallon, then our annual fuel cost is $25,000 times the gallons per mile. If gallons/mile goes from .04 yesterday (25 miles to the gallon) to .002 "right now," our fuel bill goes from $1000 to $50 (assuming we do not increase our driving). Converting these annual savings to a present value by multiplying by 10 (corresponding to an interest rate of roughly 10 percent), we would pay $9,500 more for a car that gets 500 miles to a gallon than for a car that gets 25 miles to the gallon.

The auto companies sell 15 million vehicles a year. If they could get $10,000 more per car, that would be $150 billion more per year in revenue. If the economics of the fuel-efficient car do not work for $150 billion per year, then a $12 billion subsidy spread over several years is not going to make much difference.

Meanwhile, sending more money to Washington is like sending more coal to Newcastle.

Once you’ve got the wheels themselves running on electricity, the basic economics strongly favor getting that electricity from the grid if you can. Burning $2-a-gallon gasoline, the power generated by current hybrid-car engines costs about 35 cents per kilowatt-hour. Many utilities, though, sell off-peak power for much less: 2 to 4 cents per kilowatt-hour. The nationwide residential price is still only 8.5 cents or so. (Peak rates in Manhattan are higher because of the city’s heavy dependence on oil and gas, but not enough to change the basic arithmetic.) Grid kilowatts are cheaper because cheaper fuels generate them and because utility power plants run a lot more efficiently than car engines.

They argue that nuclear power is the most plausible source for electricity.

For Discussion. Have the "right-leaning military hawks" addressed Oil Econ 101?

Comments and Sharing

I like your back-of-the-envelope style calculation of the benefits of reducing fuel consumption but you overestimated the benefits of switching to hybrids (which doesn't change your main point). The cars do not last forever and you would still have to pay something per mile for electric power. The actual benefit of a rechargable hybrid would probably be less than $4000. However, the technology is improving (with or without the subsidy) and it may be that in a few years the auto makers will produce a rechargable hybrid for only $3000 over the cost of a regular car. For people who drive a lot, it might be worthwhile.

I think the "right wing hawks" are simply ignorant. I don't believe it is necessary to turn to hybrid cars (except for people who want them). There is plenty of oil in Canada's tar sands and the oil shale deposits of the US. Costs of extracting a barrel of oil are down below $20/barrel. What is lacking is investment in production facilities, caused by uncertainty of a return. Saudi oil costs less than $5/barrel, so the Saudis could destroy the profit derived from tar sands by simply ramping up production until the price got below the cost of production. WHat might help the situation is for the US government to guarantee a price, say $25/barrel, for a predetermined period. The guarantee needs to be long enough and high enough to ensure a reurn on the capital investment needed to mine those tar sands.

I've long suspected that traditional present value calculations break down when calculating the value of resources with a finite supply.

That is to say, traditional present value calculations would tell us an oilfield's value is higher if it is developed sooner and pumped faster, because of the time value of capital. The cost of a gallon of gasoline isn't based on demand over the next 500 years, but rather, primarily on the cost to develop an oilfield and bring the oil to market, as compared with cost for various other economic activities.

Some conservatives want to bring in political externalities. But I think perhaps there are additional economic factors that aren't accounted for with net present value and the current cost to drive a mile.

500 miles per gallon of gasoline. That's not science fiction; that's achievable right now.

Without documented proof from a reliable source, it is science fiction. No, its a fairy tale. One that emerges from the same idiotic ooze that, in the 1960s, accused oil companies of suppressing 500 mpg carburetors to save the gasoline business.

And we must be careful about using rational economics to disprove what has been put forth to solve a political problem. They are saying that whatever the cost, we must reduce our reliance on foreign oil. An economist replies that it makes no economic sense to pay a $5,000 premium for a hybrid Prius. Its not a debate, its two people shouting past each other.

A synthetic liquid plastic fuel, using mass production methods, could be produced to approximately $70/barrel by my estimate. Complete redesign of Motors(remember We are talking about plastic explosives here) could get up to 300/mpg. The Oil necessary for such manufacture would be only about 17-19% of current vehicle usage. The glory of it lies in pulling much less Carbon from the ground.lgl

The problem with your back of the envelop calculation is that it assumes the 500 mpg car is exactly like the 25 mpg one. In reality it is the opposite, the 500 mpg car is most likely smaller, has less acceleration, probably has higher repair costs and a host of other problems that subtract from its value.

With a $10,000 premium added to the value of the car for fuel savings how much has to be subtracted for those other changes?

One simple idea I had would be a simple $500 tax/refund. For each category of cars the least fuel efficient 10% sold would have a $500 tax and the most fuel efficient 10% sold would get a $500 subsidy. The tax is revenue neutral to the gov't but it certainly would push the average fuel efficiency higher.

The argument seems to be that 12B in taxpayer's money is a drop in the bucket compared to the 150B/yr efficiency incentive. But that 150B is in (supposed) revenue, which needs to pay for the added cost of making the vehicles, etc, not in money available for R&D. Mature industries spend perhaps 1-2% of revenue on R&D. So the amount of industrial R&D incentive is perhaps 3-6B, assuming that an efficiency improvement of 20x is possible. A more realistic, though still difficult, objective would be 2x (25 MPGe -> 50 MPGe). This cuts the industrial incentive by another factor of ten.

So, 12B looks like a lot, even if it's over several years. Given that not all costs of gasoline are included in the price at the pump (Iraq, eg), some taxpayer investment seems reasonable.

Harold: the tar sands don't need price guarantees, the limits on their development are practical, not economic. At $10/barrel, running the operations was slow (but still profitable!), and new investment was delayed. At $50/barrel, investment money pours in, and Fort McMurray is the fastest growing city in Canada.

I know its unfair to clutter the discussion with facts, but the US Department of Energy has an easy to understand piece showing where the energy in a gallon of gasoline goes. With pictures and everything.

Only about 12.6% gets to the back wheels. The rest is lost to engine inefficiency, the air conditioner, the transmission or is wasted idling through McDonalds. If all those losses were eliminated (Newton would be proud and amazed), today's 30 mpg car would deliver over 230 mpg -- my back of the envelope calculation. If you added perfect regenerative braking (what a "hybrid" does imperfectly), you could double that number.

This is all impossible but I present it to put the claims of Max Boot in the same room with the laws of physics.

And finally, the Bush Energy Plan is full of facts and ideas. It does not have the quick fix that many are looking for. Nor does it suggest that we can tax (and spend) our way into energy independence. Its worth reading.

I have a question. How much would the improved efficiency grow the economy? People will have $950 more, to use the example, in their pocket each year. Times around 250 million people (rough estimate) the result would be ~240 billion dollars per year. Sounds good for a 12 billion dollar government program, or am I over simplifying the situation.

Brent: There is no $950. There are not, nor will there ever be 500 mpg cars. Just the cost of rewriting all our physics books would be prohibitive.

What we are searching for is a way to drive the kids to school using sunlight, uranium, wind, coal, used cooking oil or dry leaves instead of oil. We need a convenient intermediary such as electricity to charge batteries or hydrogen to power a fuel cell or modified car engine. Both show potential but neither is ready for prime time. Yet.

We have many economical sources of energy. Except for oil, we don't a good way of getting that energy into a car so we can drive crosstown or crosscountry.

My main point was that this was a government program aimed at improving efficiency. Not an entitlement program which produces inefficiency. The goal of the program was overall decrease in oil usage by 50% which would mean $500 per year to use the original calculation (not $950). I realize that there are not going to be any 500 mpg cars any time soon, but if you look at the difference between the highway mileage you get and the city mileage, if a good power absorbing braking system was developed (instead of dissipating heat), your city mileage would be higher then your highway mileage (because of the higher wind resistance at speed). There are huge technical hurdles to storing the amount of power required to stop a car, and the benefit for auto companies is virtually nil (unless EPA regs were drastically changed). If improving government efficiency helps grow the economy, then can improving technical efficiency help grow the economy also?

Brent: Spending money to send the kids to college or to buy a new table saw instead of keeping the Navigator full could be a good thing. And every day, people decide between buying big cars/trucks that use a lot of gas and small cars/trucks that use a lot less gas.

We don't need to spend tax dollars to get better mileage. Honda and Toyota will sell a hybrid to anyone who wants it (Civic Hybrid, Accord Hybrid, Prius) and Toyota/Lexus will soon be delivering larger hybrids -- the RX400h and GS450h. Ford has announced the Escape Hybrid SUV. Hybrid technology has matured to production status at the same time the market is ready to pay for it.

Jim: I realize market forces are generally fairly efficient and that the major companies are beginning to supply a demand, but I think as a general principle Libertarians think all government programs are bad (simply a knee jerk reaction). This looks like a government program that will actually (if it accomplishes its goal, and that is entirely another subject for discussion) save Americans more money then it took to fund the program. I just think that makes sense, much more then most government programs. I think that not all government programs are a waste of money for example: ARPANET.
Basically I can think of a lot of good reasons to fund a program like this one, and a lot of reasons not to fund a program like this, but I think this is the kind of program that should merit a closer look.

Randy: I agree, it's just the post was about a government program on conservation, with a suitable potential payback to the amercian public. Personally, I think alternative energy might be a better investment, for tax dollars then conservation, but I'm not an expert.

The Washington Post article calls for spending $12 billion in four years to reduce oil use 50% by 2025. The actual Set America Free document (pdf) projects that the US would import 12 million barrels per day (mbd) in 2025 compared to today’s 10 mbd. If nothing is done, they opine that the US will import 20 mbd in 2025.

Then, Max Boot throws out a bunch of potential technologies including the mythical 500 mpg cars.

Finally, Arnold Kling makes a back of the envelope calculation to see if it makes sense to spend $12 billion to develop a 500 mpg car. And … It does! Trouble is, there will never be a 500 mpg car. Set America Free’s $12 billion plan will reduce oil imports using non-petroleum energy sources, not by getting astronomical gas mileage. And there is no projected energy cost savings.

I want to point out that I am not directly advocating this bill just that it seems like a closer look at how the bill would accomplish its goals is merited. If they cut our oil needs in half (by 50%) that amounts to $500 per year savings on oil. (1000 annual expenditure figure from Arnold divided by 2). That 500 dollars per driver ($100 billion assuming 200 million drivers) has to go somewhere. It will either go to domestic energy production (ie Nuclear, Hydrogen, etc) if an alternative is developed or it will go in people's pockets if efficiency is improved. Either way, the benefit is to the American public in a much larger amount then the cost of the bill. If it goes directly into their pocket, it benefits the economy directly; if it goes to domestic energy production it will lower the trade deficit, because oil is a large portion of the trade deficit. Most likely if the methodology in the bill is sound both the efficiency and alternatives will be developed, and the economy will be boosted in addition to reducing the trade imbalance. Now I do need to repeat that I have doubts that the bill could do what it claims it would be able to do, but as you stated in a previous post only 12% or so energy makes it to the rear wheels (or front wheels for most modern cars), that’s a lot of room for improvement, and a $12 billion subsidy that could yeild potentially $100 billion anually sounds like the kind of government we should be looking for.

Put another way, you still get to consume the energy another year, when otherwise you might not be able to do so at a reasonable cost. The benefit includes not just the savings in the year saved, but also the fact that the finite resource has not been consumed.

There is also the benefit of getting there first - something the US has ceded to Japan in the automobile industry. The nation that takes on the task of creating more efficient technology is likely to gain the competitive advantage to produce that technology. Japan might not earn a lot of money on the first two generations of hybrid vehicles, by this measure, but might be positioned to dominate a marketplace 30 years from now.

There is also the potential competitive advantage or disadvantage of efficiency in the future. Suppose energy prices were to increase five-fold. The current generation of cars wouldn't matter; they would dissappear quickly enough. But if one nation has a less efficient infrastructure, that would turn into a big competitive disadvantage. Buildings, though, are not so easy to retire. The suburban sprawl that has been so appealing in the twentieth century could turn into a competitive disadvantage, if in fact the cost of transportation goes up.

If a competitor nation has a more efficient infrastructure, the advantage might not make much different until energy cost increases, or population density increases, etc.

The federal government doesn't have $12 billion to spend on this project. They're currently spending more than they're taking in.

The stated objective of Set America Free is to reduce the importation of foreign oil. The most direct way to achieve that is to legislate limits on importation of foreign oil and let the market find a way to get us to work and get the kids to school. Of course, it will be harder to get the legislation enacted than it would be to spend $12 billion.

Always bothered by the way people approach energy policy. Every form of energy production is going to produce some pollution; it is a question of where and when. What will fuel the plants generating electricity to run those electric cars - coal if Senator Byrd has his way, and he usually does, or natural gas which is also imported from countries we don't like. Lots of people tout nuclear, but there is the little problem of what to do with all that radioactive waste. Subsidies for various technologies is an insane idea for creating another entitlement with a crowd of lobbyists and PR folks crying and moaning anytime someone suggest reducing the rate of annual increase in the subsidy. If we don't like importing oil from Saudi Arabia, and I think we should not, simply impose a tarrif. The tarrif increases the relative cost of imported oil. That makes various domestic substitutes more economical. A generally higher cost of energy will provide incentives for more efficient use. The revenue can be used to mitigate the effects of pollution from whatever source. What we are doing now is borrowing money from the Chinese and Japanese to police the Arab/Persian Gulf so the Saudis can safely continue to sell overpriced oil to Chinese and Japanese industries and use the profits to fund schools in southeast Asia, right on the sea lanes between the Gulf and east Asia, that teach young Moslems to hate the west. Only a briliant Texas lawyer like Jim Baker could work this all out.

jimbo:
The World Nuclear Association (" ... the global industrial organisation that seeks to promote the peaceful worldwide use of nuclear power as a sustainable energy resource for the coming centuries.") has information about the volume of radioactive waste.

In countries with nuclear power, radioactive wastes comprise less than 1% of total industrial toxic wastes (which remains hazardous indefinitely).

Also, there is more information available here about Yucca Mountain (the US repository for high level nuclear waste) than any reasonable person could read in a week.

And finally, while I believe that one solution to the "too much reliance on imported oil" problem (assuming that the US Government takes such a position officially, not just in press releases and sound bites) would be tariffs or limits, they may violate free trade agreements.

Edge:
The “Transition Cost” in today’s headlines is the TRANSITION FROM pretending that Social Security has no long term obligations TO quantifying them, putting them on the balance sheet and admitting that there are no assets squirreled away to cover them. A situation we wouldn’t tolerate in the insurance industry.

Social Security’s “Transition Cost” is a non-cash bookkeeping entry. The $12 billion is real money. With no payback.

The problem with the 500 mpg argument is that it is 500 mpg of gasoline. They are talking of running the car on an ethanol/gasoline mixture, but not counting the ethanol in that 500 mpg figure.
To look at it another way, you can already run a diesel on used cooking oil (done regularly in parts of the UK)and thus use no oil based fuels. Does this mean the car has an infinite mpg? No, of course not. Which is why the 500 mpg figure given is nonsense. In an 85/15 ethanol/gas mix, to get to the 500 mpg figure they are only counting the 15% of the fuel that is gas.

Here is another perspective: America currently uses around 20 million barrels of oil a day at $50 per barrel that amounts to 1 billion dollars per day. Of that we import 12 million and produce roughly 8 million. If we reduce our dependency on oil by half (because of a 12 billion dollar program) we will move 6 million barrels times $50 per barrel back into our economy (total of $300 million per day) total payback period 40 days. The alternative sources of energy that could put money back into the US economy are:

Hydrogen - produced locally through the electrolysis of water, will need more coal, nukes, wind, solar, etc. Electricity will be produced in the US as the infrastructure (poles, transformers, etc) to import it is almost non-existent.

Ethanol - produced by converting sugars in corn to alcohol (possible result ending farm subsidies)

Electric - see hydrogen

The above analysis assumes that the levels of import oil and domestic production stay the same, however even if they don’t the price of oil is likely to fall due to a reduction in demand from the largest consumer of oil. If the reduction of our dependency on oil reduced the price by just $5 dollars per barrel, the resultant savings to the American public is $5 times 20 million barrels or 100 million dollars (resulting in a 120 day pay back period). There are so many different ways that this kind of program can benefit the American economy dismissing it out of hand as a wasteful program doesn’t seem like a good idea.

Tim Worstall has pointed out the flaw in Arnold's calculation. The proposal is that cars can get 500 miles per gallon of petroleum. The 85 to 90% ethanol is not free. In fact with current production methods, it will cost the consumer more than the gasoline it replaces. What everyone seems to fail to realize is that hybrid cars only consume about 15% less gasoline per mile than an equivalent conventional engine car with similar performance. Batteries are heavy and it takes energy to accelerate and decelerate that extra weight, not to mention the replacement cost of the battery pack every four years or so.

I love the discussion of energy - everyone has an idea they strongly believe in. But, when it comes to funding (betting on) those ideas, I would prefer to have it done by those same individuals, and not by me through increased taxes.

As for the Saudis, if they are willing to sell their oil, why not let people buy it, including Americans? Having lived through the oil panics of the 70s, I am not overly worried about the security of our country, as I saw then how quickly people scrambled to 'save energy,' i.e. reduce their personal energy bills, and the net effect, which was plummeting gas prices due to reduced demand.

As for me, I have reduced my demand for gasoline to almost nothing. I sold my car.

Just because the warranty is eight years, doesn't mean the batteries will actually last that long. All it means is that the price of the first replacement is, or will be, built into the sales price of the vehicle. Not so long ago there were car batteries that were warranted forever. You still replaced them every four years or so.

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